Greetings from back in the good ol’ USA (But congrats to the Raptors – We the North!)

June 22, 2019

Greetings;

We have bunches of good news, some less so, and some neither good nor bad …

Good News: Kansas City Southern CEO Pat Ottensmeyer won the 2019 “Railroad Innovator of the Year”, given at RailTrends (www.railtrends.com ) – and no one deserves it more. What a series of challenges Pat and KCS have had to negotiate – and they are not done yet (see below). Bad news: Matt Bell and the NRC (Rail Construction & outsourcing) have parted ways – that’s a loss for the industry.

More bad news - Volumes aren’t recovering so the encouraging “reaffirmations” of 2019 volume/earnings outlook, so prevalent in the Q1/19 calls, will likely not be the theme for Q2/19 next month! Now, I don’t care about that, per se, but as we slowly pass the winter wet weather impacts, and try to decipher the tweet effects, it does lead us to ask: What’s going on? Yes, comparisons are tough but, still….

The May RTI (AAR) noted that the 3% decline in US/Canadian total traffic represented the 4th straight month of decline; only 6/20 commodities increased (CBR, chemicals) in the US (8/20 in Canada). In fact, Canada was the saving grace – US carloads dropped 2% and intermodal almost 6%; whereas Canadian carloads were up 2.5% and intermodal eked out a slight (+0.4%) gain. Canadian coal was actually up 5% (vs US -0.4%) and motor vehicles +8% (-3%). Must be the clean living….we the north!

More recent traffic is even more worrisome: the AAR reports that for the week ended 6/8/19 North American volume (Mexico gets to play in the AAR weekly but not monthly numbers) was down more than the YTD levels – carloads and intermodal both down 6%; once again only Canada showed positive results (+2%/1%).

Future bad news – “Weaponized Trade, trade wars and lasting impacts; or, the never dull growth opportunity for KCS (etc): Wow, that whole Mexico trade war over immigration was a whirlwind! Two thoughts on the POTUS decision and reversal, leaving out the “secret deal in the envelope” – the reprieve is only for 45 days or so (to demonstrate progress in an intractable problem), and what does this cyclone of uncertainty do to capital investment (by rail customers, etc)? And is that the very idea? How long can AMLO (FT: “Mexico’s Magical Thinker”) be patient in the face not only of threats but of (seemingly) arbitrary threats? Mexican public approval of the US has plummeted from 2/3 favorable only 2 short years ago 30 32% currently. What will this mean for the passage of the (ugh) USMCA as we enter the election cycle here? Laredo is the key – for rail & truck (truck shipments were up 6% at that border crossing last year). Some more thoughts:

The tariffs would have (may be?) very harmful to the auto industry; the response to the US Ag industry. Ugh. And consensus was a reduction in US GDP by ~0.7 points…. The proposed tariff would have violated NAFTA (both 1.0 and 2.0!) – what are the implications of that?

Mexico had thought to be a winner in the other trade war, the one with China (ignoring the emerging front in India for now). But a recent US Chamber study of US business in China found that, while 40% are considering (some form of) relocation, only 10.6% are considering Mexico (although its almost 2X the USA, supposed intent of all of this; 25% are looking to other Asian locations)

Mexican sovereign (and Pemex) debt has been downgraded by Fitch and Moody’s….

But US imports from Mexico were still up 5% (Q1/19)….

Meanwhile US imports from China are down 5% over the first five months, and that may be the tip of the iceberg; “Sea-Intelligence” is anticipating a 10-15% reduction in total US imported TEUs in the coming “peak season” due to reductions from China (that seems aggressive but, still….).

You always take the weather with you, or theirs is something happening here: the news has been full of weather issue with relevance to rail. Here are five:

The USDA reduced the grain outlook due to the wet (and “expected bigger rainfall conditions”) fields

Barge shipping has been jammed up by the Illinois, Arkansas and portions of the Mississippi River closures, due to too much water

On the other hand, the Panama Canal is still suffering form too little, which looks to be chronic

On the Bright side, the Northern Sea Route, which cuts distances by up to a fifth, now looks more, er, promising, and COSCO has now entered a JV with the Russian line

The coming IMO 2020 rules, meant as a response to climate change to reduce emissions in ocean-going shipping (by forcing a scrubbing of bunker-fueled engines, or a fuel switch) will be very disruptive; from a NA rail point of view it will increase “slow steaming” and therefore sharply reduce schedule consistency putting pressure on landside operations (docks, dray, warehouse, and rails).

Etc:

From Logistics Management magazine, an interesting interview with top AAR brass: https://www.logisticsmgmt.com/article/qa_aar_president_and_ceo_ian_jefferies_svp_policy_and_economics_john_gray

From the same publication, the full roundtable on volume expectations (I had passed along only my portion some weeks ago): https://www.logisticsmgmt.com/article/9th_annual_rail_intermodal_roundtable_interview_clear_signs_of_progress_in

Former Mayor Bloomberg pledged $500mm, found over the weekend in the couch in his summer home, to Beyond Carbon, and the effort to “close every coal plant in the US by 2030”; 280 closed since 2010 (241 to go….).

Blackstone, after buying in some $18.7B of warehouses, stated that “logistics is our highest conviction investment theme today”.

The IEA issued a major report on “The Future of Rail.” It will save you a lot of time to understand that the key point is that more rail use, while expensive, has a great ROI when climate, safety, efficiency and other issues are taken into account….

Class 8 truck orders “plunged” (ATA) by ~2/3 in May – so some balance may slowly be returning to the market

Lots of discussion on the idea that the retail/E-tail giants AMZN and WMRT were now negotiating directly with the rails – in the case of the former, I believe that was always the case. WMRT has also created a 53’ box fleet – a very encouraging event….

Maersk is going “back to the future” by re-instituting an intermodal inland policy that it had ended in 2011….

The AAR’s RTI noted that the decline in coal traffic 2008-18 was a $40B revenue hit! Not really an “etc”….j